Tax Refund 2025 — Should You Save or Pay Off Debt?

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The IRS reported paying an average tax refund of $1,928 for the 2025 tax season as of Jan. 31. That’s a big leap from the 2024 average of $1,395, but it’s normal. The agency stated that early filers often have bigger refunds, which helps explain their urgency in submitting their returns quickly. The numbers tend to even out as tax season progresses, and the stragglers file in pursuit of less enviable refunds.

Either way, the average taxpayer can look forward to a four-figure payback — often their biggest windfall of the year. So, what’s the best way to put those refunds to good use? Should they bank the cash in a savings account or use it to pay down debt?

The right move depends on the taxpayer, the refund, the debt and the current status of their savings account. Answer the following three questions to find the solution that best suits your finances.

Do You Have an Emergency Fund?

If you carry debt, particularly high-interest debt, you might be eager to pay it down. That’s a smart move — but only if you have at least some emergency savings.

The danger in putting your entire refund toward debt reduction with nothing in the bank is that if the inevitable emergency strikes, even something as simple as a car repair will force you to reach for your credit cards again and pile on even more debt.

Most experts recommend building a three-to-six-month buffer of emergency cash, which you can do while paying down debt simultaneously after you have enough savings to get you through in a pinch. Personal finance celebrity Dave Ramsey recommended building a “starter” emergency fund of $1,000 before addressing your debt. Others say to build one month’s worth of savings, and then start splitting your money between growing your emergency fund and eliminating debt.

What’s Your Interest Rate?

Although interest rates have fallen from their peak, Forbes reported that savings yields approaching 5% are still there for the taking — but they won’t be for long. If your debt is manageable, it’s still a great time to amass cash reserves.

If you’ve built at least your starter emergency fund, Mutual of Omaha recommended examining your debt, searching for high-yield savings accounts and doing some quick math.

For example, if your savings yield is higher than your loan rate, bank the cash while paying as little as possible to service your debt while rates are still high. On the other hand, if you’re earning 3% or 4% from your savings account, but paying 9% on a debt, you might want to pad your savings only for a short while and then concentrate on debt reduction. However, if you’re paying 28% on a credit card balance, even the best savings yield won’t make a dent — attack your debt as soon as you build your starter savings fund.

What Kind of Debt Do You Have?

Finally, consider the type of debt when making your decision about how to allocate your tax refund:

• According to Experian, you should pay any past-due accounts, accounts in collections or otherwise toxic debt before saving any of your windfall.
• Presuming you have a starter emergency fund and no past-due or collections accounts, put the rest of your refund toward paying down revolving credit card balances before you get to term loans.
• According to Citi, it might be a safer bet to put variable-rate term loans on the back burner behind fixed-rate loans because interest rates are expected to fall in the coming months.
• LendingTree suggested prioritizing secured debt over unsecured debt because lenders can repossess your assets if you get into trouble.

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